A vibrant festive season notwithstanding, things are hardly looking up for the real estate sector. The notion that real estate is the best asset class to fight inflation as it gets high positive returns on investment may not hold true in the coming times. The increase in the residential prices, which was steep in the last few years, has moderated by more than 20 per cent in the last two years. According to experts, real estate is likely to under-perform as an asset class in the current environment.
Sample this. According to the Reserve Bank of India’s (RBI) house price index (HPI), the index had been growing at an annual average rate of 20 per cent year-on-year in 2011-12 and 2012-13. However, the pace of growth in the average house prices slowed in 2013-14 at 12.7 per cent, plausibly reflecting a correction in trends on the back of subdued demand.
For the latest Q4 of 2013-14 quarter, the y-o-y increase in the HPI at the all-India level was 11.4 per cent compared to 10.5 per cent in the preceding quarter.
Of the 10 cities tracked by the HPI, six out of 10 cities witnessed a moderation in the pace of house price appreciation, with two cities (Jaipur and Kanpur) seeing an outright y-o-y decline.
The growth in house prices has moderated in 2013-14 for Mumbai, Delhi, Kolkata, Jaipur and Kanpur. For instance, the house price in Mumbai increased on an average annual basis by 30.0 and 18.5 per cent respectively for 2011-12 and 2012-13. This has declined to 8.7 per cent in 2013-14. However, in cities like Bengaluru and Ahmedabad, house prices grew at relativity slower pace during 2012-13, but picked up momentum in 2013-14. Kolkata and Delhi which picked up momentum in the 2012-13, showed some moderation in price increase in 2013-14.
However, in the southern metros of Chennai and Bangalore, house prices increased significantly (30 per cent y-o-y).
Sonal Varma, executive director and India economist at Nomura said, “In our view, real estate should under perform as an asset class in the current environment of higher real interest rates and lower inflation. However, this should bode well for India’s medium-term outlook as it will lower the cost of setting up businesses and also increase the flow of household savings into financial assets.”
In the last two years real estate residential prices have moderated by around 23 per cent in the country and by around 15 per cent in Mumbai, also know as the Mecca of real estate, said Ashutosh Limaye, associate director, Jones Lang LaSalle.
“Real estate residential prices have moderated for the last two years and continue to remain under stress due to slow demand. Even during the festive season, sales are not picking up as much as it was expected. Prices pan-India have moderated by around 23 per cent in the last couple of years,” Limaye said.
Economic slowdown and high interest rates on home loans have shooed away buyers resulting in increase in inventory in the country. In the next one year, prices will continue to remain stable and not much correction is expected as the cost of developers have gone up and they cannot afford to correct further prices from these levels. Inventory is also likely to get cleared in the next one year.
However, the new launches are being done at lower prices compared to the existing market prices, Limaye added.
Limaye said problem is some developers are holding on to projects and not opting for a price reduction hoping for the market to revive. They want to obtain the same high profitability they have been enjoying all these years, which is resulting in inventory pile up.
Sunil Mantri, chairman, Mantri Realty, said, in the last couple of months there is a miniscule improvement in demand and enquiries as real estate prices remained steady.
“We expect the government to announce a slew of measures in the budget during February. We also expect the interest rates on housing loans to come down which might trigger demand,” Mantri added.
Kruti Jain, director, Kumar Urban Development, said, “It is a fact that the real estate market is growing through a very tough time for the last two years. In the last one year the growth in Pune has been only 2.5 per cent compared to around 8 eight per cent demand when the market is normal. This it self shows how the market has depreciated.
While the demand has slightly improved in the last two quarters, it is still not as per market expectations and it would take at least three more quarters for things to actually improve.”
Pankaj Kapoor, chief executive officer, Liases Foras, said, at the moment there is around 7,64,000 units of unsold inventory as various stages of construction available in the top eight cities. There has already been price correction in the real estate sector on an average of 15-20 per cent in the last couple of years in certain pockets.”
Going forward the sector would take couple of more quarters to witness actual demand back.
RBI data showed that the prices in the small size category has gone up at an average annual rate of 23.7 per cent in the last 4 years while the average increase has been lower for medium and large categories at 18.2 and 18.6 per cent, respectively. However, the price variations were more pronounced in the small-size category compared to the other two size categories. In 2013-14, the price increase in the small and medium size category moderated to 8.7 and 10.7 per cent respectively, while that in the large size category remained almost at the average level.